Refinancing to 30 year fixed- which option to take?

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Topic Author
mesaverde
Posts: 492
Joined: Wed May 02, 2007 4:14 pm

Refinancing to 30 year fixed- which option to take?

Post by mesaverde »

Current mortgage:
Home value: $355,000
Loan balance: $299,095 with 348 months remaining
Mortage rate: 4.5% fixed conforming
PMI: $86/month with 5+ years remaining (home value was $320k when purchased one year ago)

I'm refinancing through Aimloan to lower the rate and get rid of the PMI. I plan to stay in the home an absolute minimum of 10 years, but perhaps longer. I have enough cash in a taxable account (mostly invested in Vanguard total international index fund, but also Prime MM) to do either option & still have an emergency fund. My effective federal + state income tax rate is 17.75% and I itemize deductions under the new income tax law. The two options I'm looking at are:

1. 30 year fixed rate: 4%
Loan amount: $284,000 (80% loan to value ratio)
Closing costs: $3,500
Monthly P&I payment: $1,355

2. 30 year fixed rate: 4%
Loan Amount: $266,250 (75% loan to value ratio)
Closing costs: $770
Monthly P&I payment: $1,271

So option #2 is almost no cost, but I'd need to put an additional $15k into the deal. I lean towards wanting to keep that $15k liquid/invested, but it does appear to be a better deal. Which option would you chose and why? Any feedback would be much appreciated!
"Learn from the past, live in the present, plan for the future"
Bacchus01
Posts: 3182
Joined: Mon Dec 24, 2012 9:35 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by Bacchus01 »

Don’t look at your P&I. Just look at the I.

In scenario one you are dropping your rate .5% plus PmI. That’s a savings in year one of roughly .5% X $284k + PMI, or roughly $2,400. Your payback period on that $3500 closing costs is therefore about 18 months.

On the second deal, you’re rate also drops .5% plus PMI. You pay back the Fees on PMI savings alone in less than a year. But, you are putting up $15K.

Either scenario is a short payback on the fees relative to your timeline.

But, by putting up $15K you save about $2800 in fees. Over ten years, not using any kind of inflation factor, it means you’re saving $280/year on that $15K, or a return of about 1.9% plus any home appreciation.

You have to decide if that’s worth it. I would prefer the liquidity because I think I can return better than 1.9% over 10 years. But that’s a risk question that only you can answer.
SovereignInvestor
Posts: 603
Joined: Mon Aug 20, 2018 4:41 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by SovereignInvestor »

The extra 15K isn't lost it reduces the balance.

By putting in extra 12K (15K net of near 3K closing cost savings) you reduce your payment near 1K a year.

That's about a 8% or so return on addititional capital...1K/12K

Do you have access to liquidity at a rate lower than 8%?
Seems like a steep price for liquidity since many sources like HELOC is lower than that. Same debt position if you paid extra 15K in mortgage to save payments and then took HELOC for 15K and kept in MM for liquidity and the interest from HELOC net of MM interest is probably much lower than 8.5%. Same debt position as not putting in 15K more and owing 15K.
rascott
Posts: 2582
Joined: Wed Apr 15, 2015 10:53 am

Re: Refinancing to 30 year fixed- which option to take?

Post by rascott »

Bacchus01 wrote: Wed Jun 19, 2019 7:09 am Don’t look at your P&I. Just look at the I.

In scenario one you are dropping your rate .5% plus PmI. That’s a savings in year one of roughly .5% X $284k + PMI, or roughly $2,400. Your payback period on that $3500 closing costs is therefore about 18 months.

On the second deal, you’re rate also drops .5% plus PMI. You pay back the Fees on PMI savings alone in less than a year. But, you are putting up $15K.

Either scenario is a short payback on the fees relative to your timeline.

But, by putting up $15K you save about $2800 in fees. Over ten years, not using any kind of inflation factor, it means you’re saving $280/year on that $15K, or a return of about 1.9% plus any home appreciation.

You have to decide if that’s worth it. I would prefer the liquidity because I think I can return better than 1.9% over 10 years. But that’s a risk question that only you can answer.

He's also saving 4% I on the $15k......
AnonJohn
Posts: 295
Joined: Wed Oct 07, 2015 2:45 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by AnonJohn »

Putting together the two previous responses: the effective rate of return on the $15k is ... never mind: SovereignInvestor beat me to it. :)

Another point: Your home value will be assessed by the lendor. These assessments can be quite unpredictable. If they disagree with your value too much, you could get back into a situation and find yourself taking more capital to get rid of PMI (which is totally worth it, as you seem to know). So in that scenario the $15k could be less.

I speak from (reverse) experience. My assessment in a refinance came in what I thought was wildly high, leading me to unexpectedly use my emergency fund to pay down about $10k and drop PMI. Again: totally worth it. But I have friends who's assessments have been low by 25%, easily, seemingly because the assessor didn't like the style of the house.
Bacchus01
Posts: 3182
Joined: Mon Dec 24, 2012 9:35 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by Bacchus01 »

rascott wrote: Wed Jun 19, 2019 7:23 am
Bacchus01 wrote: Wed Jun 19, 2019 7:09 am Don’t look at your P&I. Just look at the I.

In scenario one you are dropping your rate .5% plus PmI. That’s a savings in year one of roughly .5% X $284k + PMI, or roughly $2,400. Your payback period on that $3500 closing costs is therefore about 18 months.

On the second deal, you’re rate also drops .5% plus PMI. You pay back the Fees on PMI savings alone in less than a year. But, you are putting up $15K.

Either scenario is a short payback on the fees relative to your timeline.

But, by putting up $15K you save about $2800 in fees. Over ten years, not using any kind of inflation factor, it means you’re saving $280/year on that $15K, or a return of about 1.9% plus any home appreciation.

You have to decide if that’s worth it. I would prefer the liquidity because I think I can return better than 1.9% over 10 years. But that’s a risk question that only you can answer.

He's also saving 4% I on the $15k......
That’s correct. I neglected that. So it bumps up the return to 5-6%. Again, if the OP likes that, they should do it.
Retired2013
Posts: 263
Joined: Sat Dec 12, 2015 2:53 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by Retired2013 »

mesaverde wrote: Wed Jun 19, 2019 6:39 am Current mortgage:
Home value: $355,000
Loan balance: $299,095 with 348 months remaining
Mortage rate: 4.5% fixed conforming
PMI: $86/month with 5+ years remaining (home value was $320k when purchased one year ago)

I'm refinancing through Aimloan to lower the rate and get rid of the PMI. I plan to stay in the home an absolute minimum of 10 years, but perhaps longer. I have enough cash in a taxable account (mostly invested in Vanguard total international index fund, but also Prime MM) to do either option & still have an emergency fund. My effective federal + state income tax rate is 17.75% and I itemize deductions under the new income tax law. The two options I'm looking at are:

1. 30 year fixed rate: 4%
Loan amount: $284,000 (80% loan to value ratio)
Closing costs: $3,500
Monthly P&I payment: $1,355

2. 30 year fixed rate: 4%
Loan Amount: $266,250 (75% loan to value ratio)
Closing costs: $770
Monthly P&I payment: $1,271

So option #2 is almost no cost, but I'd need to put an additional $15k into the deal. I lean towards wanting to keep that $15k liquid/invested, but it does appear to be a better deal. Which option would you chose and why? Any feedback would be much appreciated!
Did you look at 15 years? Usually interest rates are about .5% lower.
15 year $284k @ 3.5% payments = $2,030
Savings in interet paid $122,660

Even though you "itemize deductions under the new income tax law", you must be at the cap of $10k for interest and property taxes so are you really getting any additional benefit?

Look 10 years out. Which would make you happier? Loan balance $223,746 with 30 yrs mtg OR $111,603 with 15 yrs mtg.
Topic Author
mesaverde
Posts: 492
Joined: Wed May 02, 2007 4:14 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by mesaverde »

Thank you for the feedback. Aimloan has already determined the value as $355k. That amount is what I stated was the minimum value when I applied for the refinance. The value has been steadily increasing because my home is three miles from Amazon HQ2. They said they did a "computer analysis" to confirm that value (without actually sending an appraiser out and charging me for an appraisal).

I want the flexibility of the 30 year mortgage in order to maximize contributions to 457b, 403b, and Roth IRA (while remaining in the low 12% federal income tax bracket).
"Learn from the past, live in the present, plan for the future"
megabad
Posts: 3638
Joined: Fri Jun 01, 2018 4:00 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by megabad »

Just as a side note, I just ran your exact numbers through another lender assuming max credit (I think 770) and got an 80/20 conventional 30 yr at 4% with roughly the same "closing costs". However, I always hate using that term because it is so ambiguous. If the extra 5% extra down really bother you, just shop another lender.
Topic Author
mesaverde
Posts: 492
Joined: Wed May 02, 2007 4:14 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by mesaverde »

megabad wrote: Wed Jun 19, 2019 11:18 am Just as a side note, I just ran your exact numbers through another lender assuming max credit (I think 770) and got an 80/20 conventional 30 yr at 4% with roughly the same "closing costs". However, I always hate using that term because it is so ambiguous. If the extra 5% extra down really bother you, just shop another lender.
Thanks- what is the lender you ran the numbers with?
"Learn from the past, live in the present, plan for the future"
megabad
Posts: 3638
Joined: Fri Jun 01, 2018 4:00 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by megabad »

mesaverde wrote: Wed Jun 19, 2019 11:52 am
megabad wrote: Wed Jun 19, 2019 11:18 am Just as a side note, I just ran your exact numbers through another lender assuming max credit (I think 770) and got an 80/20 conventional 30 yr at 4% with roughly the same "closing costs". However, I always hate using that term because it is so ambiguous. If the extra 5% extra down really bother you, just shop another lender.
Thanks- what is the lender you ran the numbers with?
That was Provident.
Topic Author
mesaverde
Posts: 492
Joined: Wed May 02, 2007 4:14 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by mesaverde »

megabad wrote: Wed Jun 19, 2019 11:57 am
mesaverde wrote: Wed Jun 19, 2019 11:52 am
megabad wrote: Wed Jun 19, 2019 11:18 am Just as a side note, I just ran your exact numbers through another lender assuming max credit (I think 770) and got an 80/20 conventional 30 yr at 4% with roughly the same "closing costs". However, I always hate using that term because it is so ambiguous. If the extra 5% extra down really bother you, just shop another lender.
Thanks- what is the lender you ran the numbers with?
That was Provident.
Thank you. I went to the Provident website and got a quote. Their quote for 4% with 80% LTV does not include any of the closing costs that would apply. Provident's website says that it could take up to three days just to get an accurate quote from them. Through Aimloan (which has been used by many here) you can get an immediate quote (including all closing costs) without providing any personal/contact info. It looks like Provident's quote would be roughly the same or higher.
"Learn from the past, live in the present, plan for the future"
chevca
Posts: 3473
Joined: Wed Jul 26, 2017 11:22 am

Re: Refinancing to 30 year fixed- which option to take?

Post by chevca »

I'd go option 2 in a heartbeat. Almost $3k less in fees and the same mortgage rate... jump on that.

The $15k more you have to throw at the balance.... well, you want to pay down and pay off the mortgage at some point, right? And, as mentioned, it's $15k you never have to pay 4% interest on... nothing wrong with that.
megabad
Posts: 3638
Joined: Fri Jun 01, 2018 4:00 pm

Re: Refinancing to 30 year fixed- which option to take?

Post by megabad »

mesaverde wrote: Wed Jun 19, 2019 12:41 pm Thank you. I went to the Provident website and got a quote. Their quote for 4% with 80% LTV does not include any of the closing costs that would apply. Provident's website says that it could take up to three days just to get an accurate quote from them. Through Aimloan (which has been used by many here) you can get an immediate quote (including all closing costs) without providing any personal/contact info. It looks like Provident's quote would be roughly the same or higher.
I can only tell you what the site calculator told me so YMMV. You are correct if they don't have your info on file, they cannot give an an official full quote. The 4% rate with provident has a multithousand dollar rebate (ie negative points) so make sure you are comparing apples to apples. Provident is always cheaper than aimloan in my experience.
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